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Kuwait: Banking on Transformation

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Against the background of a 30-month fall in oil prices and the past year’s rise in interest rates, Sulaiman Al-Marzouq, head of treasury at National Bank of Kuwait, spoke with Global Finance about changes in Gulf economies and NBK’s role in development.

Global Finance: Kuwait’s financial sector is sound, and credit conditions remain favorable for the most part. How long can the banking system remain resilient in deteriorating economic conditions?

Sulaiman Al-Marzouq: Economic conditions have weakened in Kuwait in the lower-oil-price environment, but current conditions remain sustainable for banks. Non-oil growth is expected to remain healthy at around 4% in 2017. This is above what most other GCC countries are seeing, due largely to Kuwait’s healthy projects pipeline, which has remained on track despite lower oil prices.

GF: The government wants to tap international bond markets for $10 billion in fiscal 2016–2017. Can it do this without creating a secondary debt market first?

Al-Marzouq: A secondary market for international bonds already exists, though [a proposed issue of $10 billion in US dollar-denominated bonds] would be Kuwait’s first international sovereign issuance. Indeed, one of the ways to help develop a secondary market is to issue more and longer-maturity debt, and that has already started to happen. In addition, in a world searching for yield, diversification and good credits, Kuwait’s issuance should find a warm reception.

GF: Given the central role of small and midsize enterprises in job creation, what is your bank doing to facilitate lending to SMEs? Does the cap on lending-rate spreads hinder such lending?

Al-Marzouq: NBK’s business banking officers are available in NBK branches covering all areas in Kuwait, and our call center is equipped to direct business customers to the unit that facilitates lending to SMEs. We provide all types of lending to SMEs. We revise our lending rate on a quarterly basis to monitor our lending cap. We are expecting our lending rate to increase by the beginning of next year with the Kuwait National Fund lending facilities.

GF: How will the Kuwait banking system be affected by rising US interest rates?

Al-Marzouq: Generally, banks benefit from rising US dollar interest rates. That said, the banking sector is generally hedged against dollar interest-rate risk. Moreover, US dollar-denominated loans in general carry floating interest rates. The fact that banks generally have more interest-insensitive liabilities (such as free funds and transaction accounts) than interest-insensitive assets should result in incremental income in a rising-interest-rate environment.

Kuwait’s monetary policy is highly correlated with that of the US, and we expect that the Central Bank of Kuwait will raise its benchmark interest rate concurrently with the rise in US interest rates. However, consumer loans normally carry fixed rates, which can only be adjusted every five years by a margin of 2% max (installment loans). Rising interest rates will negatively impact the return on those loans for a period.

Al-Marzouq: There has been a correction in the real estate market. We think prices have retreated by 15%–20% from their peak; the market already looks like it is stabilizing, and further declines are likely to be limited. Also, real estate prices doubled from 2010 to 2015, so the current correction is coming off a very good run.

GF: Can plans to create more private-sector jobs for Kuwaitis succeed without taking steps to make public-sector jobs less attractive?

Al-Marzouq: Yes, it would succeed, particularly if both sectors cooperate. According to government statistics, almost 87% of Kuwait’s national labor force works in the public sector, and nearly 60% of unemployed Kuwaitis do not aspire to work in the private sector, and would prefer to wait for an opening in the public sector. This means that government efforts to encourage more citizens to work within the private sector did not reach the initial goals.

The main reason for the situation is that most private-sector companies do not provide competitive and attractive career opportunities for Kuwaitis. NBK has been working to position ourselves in the GCC market; this has been achieved through targeted talent acquisition and development initiatives. In 2016 we hired over 300 new employees, of whom 90% were Kuwaitis. Our current Kuwaitization percentage has reached 66.9%, higher than the same period last year.